An easy guide to unsecured loans

Debt has a bad rep. Borrow too much, and you may struggle with repayments. But debt doesn’t always deserve this bad rep. That’s because debt is a tool to manage your finances.

The RIGHT loan for you depends on your personal circumstances and needs. And there may be a whole lot of different solutions for you to choose from. If you want to know how to differentiate them and identify the factors that matter, this guide is for you.

Unsecured Loans 101

There are 3 main characteristics of unsecured loans:

• Multi-purpose

They can be used for a range of purposes, from buying consumer goods such as furniture and electronics, to funding your wedding or honeymoon, to consolidating your existing debts with different banks and financial institutions under a single credit card.

• Based on your creditworthiness

How much you can borrow depends on the banks' assessment of your creditworthiness - or your ability to repay - which is, in turn, influenced by factors such as your monthly salary and other loan commitments. The bank will check your credit rating before determining how much to lend you.

• Can be term or revolving loans

These determine the duration of your repayment.

Comparing term loans vs revolving loans

	Term Loans	Revolving Loans
What it is	A term loan requires a set number of payments over an agreed period of time.	A revolving loan is an arrangement under which the bank offers to lend you money, up to a specific limit. There are usually minimum monthly payments but there is no fixed period to repay the money borrowed. You can repay as quickly or slowly as you prefer. But remember, all the time, interest charges are accumulating. When funds are borrowed, the credit limit is drawn down. And when funds are repaid, the credit limit is restored.
Example	Personal loans	Credit cards Lines of credit

The 5 Common Types of Unsecured Loans

So, let’s run through the different types of unsecured loans – their key characteristics and the needs they cater for.

1. Personal loan

Personal loan is a general-purpose loan from the bank, and there are no terms & conditions to what you can use it for. Personal loans are one of the lowest-cost options for buying things that you may not have ready cash to pay for upfront.

Hallmarks of Personal Loan

• It is unsecured,
• It is a general-purpose loan, &
• It is for a fixed term of regular payments spread over months or years.

You can typically get a personal loan for up to 10 times of your monthly salary, at an annual interest rate as low as 3.88%. There is usually a processing fee of around 1%. The effective interest rate (E.I.R.) then works out at 7.56% p.a. The term of these personal loans varies from 1-5 years.

What is it suited for?

Why you would take a personal loan:

• You might want to buy something that you can’t immediately afford
• You might want to buy things without having to raise cash by selling your investments.

2. Line of Credit

Each bank names it differently. In DBS Bank, it is called “Cashline”. It is essentially an arrangement under which the bank offers an amount of funds that you can borrow –it is essentially standby cash.

Line of credit works on the revolving credit concept. This means that there is no fixed repayment term. The line of credit becomes available for reborrowing as funds are repaid. The maximum amount that you can borrow is known as the ‘credit limit’.

You will not be charged any interest until you utilise the line of credit. There is no fixed repayment period and you are not penalised for early repayment. Interest rates are typically around 0.06% per day. That adds up to around 20.5% p.a. This is high but still lower than credit card rates.

You can typically get up to 4 times your monthly salary or up to 10 times your monthly salary if your annual income is more than S$120,000.

What is it suited for?

This is a loan product for those who:

• Want convenience and easy access to cash for short periods of time, such as for a few months. It is even more convenient and cheaper than using a credit card.
• Don’t know exactly when you need the funds. For line of credit, interest is charged only when you tap on the line of credit. In contrast, interest on personal loans is charged immediately, whether you use it or not.

Line of credit enables you to tap on the funds via internet banking, or NETS, or cheque, or GIRO, or by withdrawing cash from an ATM.

3. Credit card instalment plan

This is a variation of the Personal Loan, as it allows you to buy big ticket items and make a series of instalment payments over a fixed period. The difference is you use a credit card.

In that sense, it’s like a retailer’s instalment plan with interest charges that are usually cheaper.

Typically, credit card instalment plans offer “0% interest” instalment payments. Some however charge processing fees when the retailer is not on the issuer’s list of “participating merchants”.

At DBS, there are two such plans:

1. Instalment Payment Plan which offers 0% interest if you pay instalments on time, and no processing fees if you’re shopping through a “participating merchant”. Under this plan, your purchase will not be eligible for reward points.
2. My Preferred Payment Plan which offers 0% interest if you pay instalments on time. It charges processing fees of 3%-6%, depending on how long the plan lasts. This translates to an effective interest rate (E.I.R.) of up to 18%.

Hallmarks of credit card instalment plans

• You can choose your “terms” – from months to years.
• You take the product home and pay the instalments as per the agreement.
• There are usually penalties or administration fees for early repayment.

When you’re at an electrical/furniture retailer and see signs advertising “0% interest instalment plan”, it’s usually a credit card instalment plan with a bank.

This is how it works: Say you have a credit card with a S$5,000 limit. If you purchase a new laptop worth S$2,000 on the instalment plan, your credit card limit will be drawn down by S$2,000. So, you will have only another S$3,000 left to spend on credit, until you pay down the S$2,000 purchase in instalments.

In the background, the bank will pay the retailer for you, and then charge the total amount (plus any processing fee if applicable) to your credit card.

Meanwhile, you cannot freely cancel your credit card before completing your instalment plan. If you cancel your card before completing all repayments,

• You will face penalties/administration fees
• The remaining instalments will also be accelerated and everything becomes immediately payable. If you are late in your payments, you will be charged interest.

What is it suited for?

They could be a cheaper alternative to:

• Paying with credit cards, which charge high interest rates for outstanding balances.
• Some retailers’ own instalment plans which charge interest rates that are comparable to or even higher than credit card rates.

In other words, credit card instalment plans are an attractive method for purchasing big ticket items without upfront using your own cash, especially if no processing fees are charged.

4. Balance transfer

This service enables borrowers to consolidate debts from other accounts or credit cards onto a single credit card or credit line at lower interest charges. Banks will often offer interest free periods.

Although there are processing or administration fees, which will add on to your effective interest rate (E.I.R.), it is still a lower cost alternative to standard credit card interest rates.

Typically, banks offer 0% interest rate for 6 or 12 months on their balance transfer promotions. If you have an existing credit card or credit line with a bank, you can apply fairly quickly via your digital mobile application for a balance transfer.

What is it suited for?

This is ideal if you need help managing your credit card or credit line debt:

• Perhaps you are finding it difficult to make minimum monthly repayments,
• As a result, interest charges are piling up, worsening the debt repayment burden.

A balance transfer provides you with better cash flow management allowing more flexibility to pay down the credit card or credit line debts.

5. Debt Consolidation Plan

It is a debt refinancing programme that allows borrowers to consolidate all their unsecured loan balances from different financial institutions, into one financial institution.

It is a lower cost option to clear a range of debts which could be revolving at higher interest rate. The tenure of this product is generally longer and this will allow customers to paydown their debts at a more affordable instalments amount.

The outstanding balances are effectively transferred to the debt consolidation plan account. Customers are offered interest rates as low as 3.98% p.a. (7.23% E.I.R.).

So, you can effectively transfer all your outstanding balances of unsecured credit facilities across financial institutions onto a single account at a potentially lower interest rate to better manage your debt repayment.

What is it suited for?

This would suit if:

• Your loan balances are more than 12 times of your monthly income.
• You are finding it difficult to pay off your loan balances with multiple financial institutions.
• You are looking to consolidate into a single loan at a potentially lower interest rate.

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